Food For Thought –
The purpose of the income statement is to show a business’ revenue and expenses over a period of time explains Aron Govil. In other words, it’s supposed to tell us how much money was made and how much money was spent in a given time period.
Income statements come in two basic forms: the single-step income statement and the multi-step income statement.
Although both types of earnings reports give us a lot of useful information, it’s a good idea to understand exactly what each one is telling us.
1) The Single-Step Income Statement
The single-step income statement just takes revenue minus expenses, and the result is the business’ net profit for that time period. No calculations are needed to figure out how much money was made. All of the information is there in one place. A simple example of a single-step income statement can be found below:
Single Step Income Statement Monthly Revenue $27,500 Monthly Expenses $15,000
Monthly Net Income $12,500
This is a very simple example, but you get the idea. If revenue minus expenses equals profit, then it’s a single-step income statement. In this example, if sales expectations were met and no expenditures exceeded budgeted amounts for the month, we would expect the business to have a net income of $12,500.
2) The Multi-Step Income Statement
The multi-step income statement is more complicated than the single-step version because it takes revenue and expenses from different time periods and puts them together in one statement says Aron Govil. This type of report will show how much a company earned last quarter, for example, and it will also show how much money was spent over the same time period. Below is a simple multi-step income statement showing revenue in December, expenses in January and February, and net income in March:
Multi-Step Income Statement Monthly Revenue December $27,500 January Expenses 12,000 February Expenses 19,000
Monthly Net Income March $ 3,500
As you can see, this type of income statement is more difficult to understand than its single-step counterpart. We have to calculate average expenses for the first quarter of the year. In order to project whether net income projections are realistic. Remember that “average” just means adding up all expenses for the quarter and dividing by three.
As you can see, this type of income statement is more difficult to understand than its single-step counterpart. We have to calculate average expenses for the first quarter of the year. In order to project whether net income projections are realistic. Remember that “average” just means adding up all expenses for the quarter and dividing by three.
3) The Traditional Income Statement
The traditional income statement is similar to the multi-step version. Because it shows revenue and expenses for different time periods. But it doesn’t show how much money was spent over that same period of time explains Aron Govil. This type of statement does give you all of the information you need to calculate net income. But it will take some work to figure out average expenses. A simple example of a traditional income statement can be found below:
The Traditional Income Statement Monthly Revenue December $27,500 January 25,500 February 23,000 March 20,000 April 22,000 May 21,000 June 19,000 July 18,000 August 18,500 September 20,000 October 21,500 November 22,500 December 23,000
Monthly Expenses January 12,000 February 16,000 March 18,500 April 19,500 May 20,500 June 21,000 July 21,500 August 22,000 September 19.500 October 18.000 November 16.500 December 13.000
In this example, it’s up to the reader to calculate average expenses. In order to do so, you would need to add up all of the January and February expenses ($29,000). And divide that total by two which equals $14,500. You would also have to do the same for each expense category. Throughout the year in order to get the average.
The Basics of Income Statements: SMVs and EBITDA
4) The Cash Flow Statement
Cash flow statements report how much money was spend and earn during a specific time period. But they also give you information about cash on hand and bills that need to be pay. There are several different ways to read this statement, but the cash flow summary is usually the simplest version. This section looks at how much money was spend and earn. During a time period while ignoring how an asset was acquire or pay for.
Conclusion:
Income statements are a necessary evil for every business owner says Aron Govil. They give you a way to compare your company’s performance from one year to the next. And they also demonstrate whether or not forecasts about future growth are realistic. There is no perfect way to create an income statement, but all versions should do four things.